Category Archives: Procurement Innovation

Will this be the year we traverse the supply chain plateau? Part I

Five years ago today we commented on a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. While SI always believed there is innovation to come, the Shaman presented some pretty damning evidence. Analyzing the balance sheets of process companies over the course of a decade, she found that the average process manufacturing company has reached a plateau in supply chain performance. As she stated:

Growth has stalled. To compensate and stimulate revenue, the companies increased SG&A margin by 1%. However, the conditions were more complex; the average company, over the last ten years, experienced a decline of 1% in operating margin, and an increase in the days of inventory of 5%. While cycle times have improved, the majority of the progress has come from lengthening of days of payables and squeezing suppliers.

And it’s certainly the case that delaying payments and squeezing suppliers is NOT progress!

And while SI believed, at the time, that we had not reached the plateau, SI certainly believed that growth had stalled. But why?

The Shaman conjectured that while complexity has increased, many well-intentioned executives lack the understanding of the supply chain’s potential or how to manage the supply chain as a system. So, while individual projects are getting great results, departments as a whole are not performing as well, and being managed even worse. SI had to agree.

And while SI also had to agree with the Shaman that there is a discontinuity and we need to declare the APS and ERP systems of the 1990s obsolete and start again, SI did not believe it was the core problem. SI believed the core problem was manpower capability. Not only do most executives not understand the supply chain from a holistic perspective, treating each step as its own function (and disassociating NPD/Design from Sourcing (a manufactured product) from Logistics and Distribution, when they all have to be examine and managed as part of an integrated supply chain, but neither do the function managers. Moreover, these function managers often do not even understand the best practices associated with their job.

SI conjectured the manpower capability issue was a lack of education, and hasn’t changed it’s belief. But even though little has changed on this front, there is a light in the sky now … we can see the day when we cross the plateau and see the peak ahead. How?

Scared of AI? Just Start with Auto-Buy.

Specifically, start with auto-buy on your tail-spend and non-strategic spend.

Seriously. If you’re a relatively mature organization using SSDO (Strategic Sourcing Decision Optimization) on your higher dollar or strategic categories, using auctions and RFX for mid-dollar and somewhat strategic categories, and GPOs or catalogs for significant spend categories, there’s still one category of spend that’s costing your organization a small fortune. That spend is tail spend. Up to 30% in some organizations, the average overspend is typically 15% or more (and can be up to 20% or 30%). Do the math in the typical case. Fifteen percent of thirty percent is 4.5%. If you’ve tackled your strategic sourcing categories two or three times now, chances are you’re trying to eek out 6% savings on the top 33% of spend. That’s about 2% savings.

What’s costing you more? If you’re an advanced or leading organization – the tail spend. But it’s not something you can do much about — it’s tail spend because you don’t have the manpower to deal with it. Yes, you can put a GPO or catalog in place, but it only works if you can force buyer to not only use it, but always select the right product when there are multiple options — not something most platforms can do (well). Especially if the preferred option is temporarily out of stock and something is needed tomorrow. (And the what’s the second preferred option? The third? And if it’s common, shouldn’t it be in inventory?)

And, more importantly, since most tail spend consists of individual requests, some of which should be aggregated, if the requests are directed to different buyers, how will they ever know if there are requests that should be aggregated? (They won’t. And that’s how it is.)

So why are your people even trying to manage parts of the tail-spend when, in fact, a modern AI platform can do it much better. It can amalgamate all similar requests, analyze usage trends, gather market prices, scour and compare options in your catalog and your GPO’s master contract, identify third party options available on the network, analyze usage and feedback reviews and data, determine the options that best meet your users’ needs, and select the one that offers the best value (lowest cost against reliability against organizational need) at a cost that doesn’t exceed market cost. So even if it doesn’t get the best deal, it at least ensures you don’t pay more than market price across your tail spend, which is 15% better than you are doing today.

So now that we have systems — including, but not limited to, Dhatim, LevaData, and Xeeva — that can auto-buy, it’s time to find one that works for you and get the tail spend under control. (And use them to recommend options for higher-value and more-strategic buys that you might not come up with on your own.)

What’s Procurement’s Role for 2018?

Watchdog.

As we enter the new year, the predictions and prognostications are going to get crazy again. And, like always, they are going to be of the obvious variety or, as the public defender points out, of the wild guesses.

But the reality is that from a process, power and performance perspective, not much will change … it will be the continual slow prod forward that it has been for the last decade. However, as the past few years have shown us, one thing is constant. Suppliers will fail. Disruptions and Disasters will happen. And your technology vendors will get acquired.

We’ll start with this last point first. Over the past year, Jaggaer and Coupa tried to outdo each other in an acquisition frenzy. Spend360 and Pool4Tool and Trade Extensions and BravoSolution all scooped up by Procurement space giants trying to get bigger. No matter how big, how successful, how stable, or how much they indicate a desire to remain independent, they could literally be scooped up tomorrow. Everyone has their price, and if it’s a PE firm, the company is flipped as soon as that price is met. And as we discussed in our recent post on M&A on how The Mania Continues, if this means there is solution duplication, at some point, you can be pretty much assured someone’s solution is going away. M&A’s are done to enhance synergy of offering or enhance profit through synergy of operation where you can reduce staff and product footprint against a larger customer base.

This means that Procurement has to expect that, at some point, at least one of its preferred platforms is going up in smoke, and has to be on the ball to identify what platform may be at risk, when, and what steps will have to be taken to mitigate that risk.

Similarly, it will have to insure it is keeping an eye on all critical suppliers — which, as the best know, is not just the 20% of suppliers who get 80% of the spend, but any sole-source or dual-source supplier that supplies a product or service critical to the organization’s primary product lines. If the product line could not be offered, or not offered to the full extent, without that supplier, any impending issues need to be detected early. This will mean keeping an eye on the organization’s credit risk, timeliness (if shipments get later and later, that could be an indication of trouble), sustainability ratings, negative mentions in the news, and so on. (An SRM solution that integrates with risk watchdogs will be critical.)

And, finally, it has to be on the alert for natural or man-made disasters that can pose a risk to parts of its global supply chains. It not only needs to know when an event happens that could affect a critical part of its supply base, but what suppliers in particular will be effected.

It has to be a watchdog on constant alert. Just sourcing and negotiating great deals is not enough. They have to be realized. And, for that, Procurement must be the best watchdog there is.

Source-to-Pay UIX 2017 (Collected Links)

What Makes a Great U(I)X?

What Makes a Great e-Sourcing U(I)X?

What Makes a Great (Strategic Sourcing Decision) Optimization U(I)X?

What Makes a Great Spend Analysis U(I)X?

UX Epilogue

Can You Stop Your Event Dead In Its Tracks?

The best laid schemes o’ Mice an’ Men … often go awry. And in the Supply Manager’s world, they often do. And, to be frank, more often than you realize. And sometimes market reality will shift in an instant and continuing a current event could cause considerable loss, and not the significant value that was initially expected.

In this case a Sourcing or Procurement event, even if for a critical product or service needed in a short time frame, will need to be stopped in its tracks. But can you do it? Or will you continue with an auction only to see costs (significantly) increase (if there is no ceiling? Or an RFX only to get no responses at the deadline (with not enough time to try again)? Or a catalog buy for a product that shouldn’t be bought (because excess supply at a non-preferred supplier just resulted in a huge price drop the organization could safely take advantage of)?

And then, even more importantly, the right event will need to be kicked off in its place. An RFX or Auction might need to be replaced with a strategic renegotiation with an incumbent? A catalog buy might need to be replaced with a spot-buy auction to a set of acceptable suppliers with equivalent products? A simple RFX might need to be expanded to a more complex optimization-backed multi-round RFX to take advantage of new entrants shaking up the market. And so on.

But for this to happen, four critical abilities need to be in place.

  1. The ability to detect market shifts that would necessitate a significant change in Sourcing or Procurement strategy.
  2. The ability to determine the appropriate Sourcing or Strategy to shift to.
  3. The ability to quickly terminate an existing event (type).
  4. The ability to structure and launch a replacement event quickly.

1. The ability to detect market shifts.

This requires continuous, real-time, market monitoring which, to be honest, cannot be done without significant software support, and is a proper application of AI in sourcing and procurement. (But this is a subject for another post [series].)

2. The ability to determine the appropriate strategy w.r.t. the shift.

This requires both software support — to extract key details of the shift, summarize it in a meaningful way, and suggest the option(s) likely to be best — and senior buyer wisdom to make the right decision.

3. The ability to quickly terminate an event.

This requires the ability to quickly terminate an event, and do so in a way that will not result in offended suppliers and lawsuit. While not likely possible in the public sector, with proper foresight, and notification, as part of the terms and conditions a supplier must accept to participate, this can happen.

4. The ability to launch a replacement event quickly.

This requires the ability to set up new events quickly, reusing as much information as the current event as possible. This will require great software support (but not necessarily AI).

As you can see, not easy, but sometimes it literally is the difference between a multi-million dollar win, and a multi-million dollar loss.